Some pain needed for long-term growth story

September 17, 2012

(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)

The senior Bush’s call for a new world order following the end of the Cold War began unravelling authoritarian regimes which formed its delivery mechanism around the world.

In India, it meant dismantling the command economy influenced by the Soviet model, enforced through the government’s involvement in business and concentration of power at the centre.

It is hardly surprising that Indian polity, most of which leans left-of-centre, is opposed to reforms leading to economic liberalisation. After all, as the main beneficiaries of that set-up, their very political identity is at stake.

On the external front, India’s foreign policy has little political and economic choice but to move westwards.

As expected, the transition also had states gradually weaning away from the centre as regional vote bank politics resulted in coalition governments. It may be some time before we see a single-party government.

This is the second minority government led by the Congress with the support of those wanting to keep the right out of power. Therefore, while the first half of the term is spent staying in power, the second half sees some policy action.

As matters stand today, both coalitions and their constituents need more time to face elections because neither seems confident of facing early polls.

While in the last term it was brinkmanship on the nuclear deal; this time it’s the sudden burst of reform announcements.

Apart from the image crisis resulting from the questions raised in the CAG reports and policy inaction, it is the sudden and open threat of a third front alternative emerging from its own coalition partners which has pushed the government to quickly call their bluff.

The new finance minister, who is not known for being sympathetic to the old school of economic policy, deserves credit for swiftly moving to address the subject of highest priority — the threat to our credit rating because of the devastating impact it could have on our ability to raise external debt and its costs.

Chidambaram has also managed to shake off the negativity in the markets and despondency in business circles.

In reality, the oil deficit of about 2 trillion rupees is hardly dented by the diesel price hike and it’s not good economics to sell assets to reduce fiscal deficit. FDI in multi-brand retail cannot address inflation so long as the agro-marketing law exists.

However, if not anything else, these announcements seem to have flagged off the fiscal deficit crisis for public debate without providing a solution.

Finally, by unilaterally removing the FDI restriction on multi-brand retail and leaving its introduction to the states, the centre has taken another giant leap towards federalisation. Each state will have the freedom to opt for liberalisation or pay the political price for not delivering economic progress to its population. I am confident this will eventually place economics ahead of narrow-minded regional vote bank agendas.

The government deserves credit for making the best of the situation. I would hold back on popping the champagne till we see policy changes being executed on the ground.

I only hope that while managing perceptions, we do not take our eyes off the real issues surrounding inflation and fiscal profligacy.

Having said this, the nation is in the midst of serious change to adjust to the new world order and as with every change, the people and our politicians have to endure some pain if we wish to keep the India long-term growth story alive.

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